IRS Notice 2017-73 (the “Notice”) provides advance notice of U.S. Treasury and IRS’ proposed rule changes for Donor-Advised Funds (“DAF’s”). Comments are requested by March 5, 2018. The Notice represents a significant departure from the rules governing the use of DAF’s by donors, sponsoring organizations, charities and their tax advisors. The Notice addresses the following three questions:

Charitable Pledges: May DAF distributions be used to pay a donors’ charitable pledges without triggering penalty taxes under Section 4967?

Charity Event Tickets and Memberships: May DAF distributions be used to pay the charitable portion of tickets to attend charity-sponsored events, which are used by its donors, advisors and members of their extended families, without triggering penalty taxes under Section 4967?

DAF Grants and Public Support Test: May a donee charity use DAF distributions to demonstrate that is has substantial public support and should not be classified as a private foundation? How will “anonymous contributions” be treated to determine if the donee charity has substantial public support?

Additional Comments Requested: In addition to requesting comments on the above issues, the Treasury Department and IRS would like comments on the following:

How do private foundations use DAFs to support their purposes?

Whether a time limit should be placed on a distribution from a DAF to a qualifying charity for grants made by a private foundation to a DAF to satisfy the private foundation’s qualifying distribution requirement?

What other considerations should be taken into account for DAFs with multiple unrelated donors with regard to the public support proposal change?

What methods could be used to streamline recordkeeping by DAFs and public charities for the public support proposal change?

The Notice is detailed and provides examples to explain the background and considerations of its proposed changes. To understand its full intent, the Notice should be read in its entirety. To view a more in-depth analysis by Mr. Robinson on this topic, click here.

The Tax Cuts and Jobs Act of 2017, Public Law No. 115-97, was signed into law on December 22, 2017 by President Donald Trump. The final bill had tax implications for trusts and estates as well as for individuals and corporations:

Lifetime Exclusion: The lifetime exclusion amount from estate tax under Section 2010(c)(3) is increased from $5,000,000 to $10,000,000 per decedent. This increase is in effect for estates in which the decedent dies after December 31, 2017 and before January 1, 2026.

The lifetime exclusion amount for gift tax is also increased to $10,000,000 per donor from $5,000,000.

The amount of the exclusion for both amounts is adjusted for inflation using the Chained-CPI.

No “Clawback” on Exclusion Amount: Regulations will be forthcoming to deal with gifts made during the time this exclusion amount is in effect and whatever the basic exclusion amount under Section 201(c)(3) so that there will be no “clawback.”

A “clawback,” with regard to this section, might occur if, after the time period lapses, the exclusion amount reverts back to its previous amount prior to the enactment of this bill. Without modification language to avoid a “clawback,” amounts gifted under the increased exclusion levels during of the Tax Cuts and Jobs Act could become taxable.

Tax Rates for Estates and Trusts:

Taxable income is: The tax is:

Not over $2,550 ……………………………………….. 10% of taxable income.

Over $2,550 but not over $9,150 ……………….. $255, plus 24% of the excess over $2,550.

Over $9,150 but not over $12,500 ……………… $1,839, plus 35% of the excess over $9,150.

Over $12,500 …………………………………………… $3,011.50, plus 37% of the excess over $12,500.

Personal Exemption Amount: Deductions for personal exemptions under Section 151(d) are suspended under the Act, but there is an exception for qualified disability trusts. Disability trusts permitted to take the personal exemption deduction under Section 642(b)(2)(C) will be allowed a deduction of $4,150, adjusted for inflation.

Miscellaneous Itemized Deductions: Deductions for miscellaneous itemized deductions subject to the 2% floor, such as tax and investment advice, are suspended for taxable years 2018 through 2025.

Note: The language of the provision under new Section 67(g) refers specifically to miscellaneous itemized deductions. However, the deduction for trust administration services under Section 67(e) does not fall under miscellaneous itemized deductions. The current view is that this deduction for trusts and estates will still be available, but further guidance is hoped for.

Qualified Business Deduction: The 20% Qualified Business Deduction for pass-through entities will impacts trusts and estates with qualified trades or businesses.

The new QBI deduction benefits all business owners, other than C corporations, irrespective of whether they operate their businesses as sole proprietorships, partnerships, S corporations, estates or trusts. The business deduction is claimed in the taxable year in which the related business income is reported by the taxpayer.

The Massachusetts Supreme Judicial Court, in the case of Ajemian v. Yahoo!, Inc., held that the Stored Communications Act (SCA), a 1986 federal law that regulates the disclosure of electronic communications, does not prohibit Yahoo!, Inc., from voluntarily disclosing the contents of a decedent’s email account to the administrators of a decedent’s estate.

The decision represents the continuation of an eight year legal dispute, initially commenced in 2009, that arose after the administrators of John Ajemian’s estate filed a complaint with the probate court requesting “unfettered” access to John’s Yahoo email account. Yahoo refused to provide access to this account.

The Supreme Judicial Court agreed to hear the case on its own motion after the estate appealed the probate court’s award for summary judgment in favor of Yahoo. The probate court awarded summary judgment to Yahoo on the basis that the SCA prohibited Yahoo from disclosing the contents of the account to the estate administrators. The Supreme Judicial Court ultimately disagreed and vacated the probate court’s judgment.

The Supreme Judicial Court’s decision turned on whether the estate’s request for access to the email account fell within the “lawful consent exception” of the SCA thereby permitting Yahoo to voluntarily disclose the contents of the emails. Rejecting the industry consensus that this lawful consent exception requires actual or express consent of a decedent, the Court held that the administrators could consent to such a disclosure on behalf of the decedent. To interpret the SCA otherwise, the Court reasoned, would prevent personal representatives from accessing a decedent’s digital assets and thereby preempt state probate and common law.

This decision, however, has its limits. First, the Court did not mandate Yahoo to divulge the contents of the email account; it merely permitted Yahoo to do so. As the Court explained, the SCA “does not stand in the way” of such a disclosure. Second, it remains to be seen whether this case will be challenged in federal court, as it is a state court’s interpretation of federal law. Third, the case raises the question of whether online providers such as Yahoo can rely on their terms of service agreements as a basis in refusing access to (and perhaps deleting altogether) a decedent’s digital assets. The Supreme Judicial Court did not take up this issue instead electing to remand the case to the probate court for further hearing on this issue. Stay tuned.

Yesterday, Republicans in the House of Representatives unveiled the “Tax Cuts and Jobs Act.” Notably, the tax reform bill:

Increases the basic exclusion amount for estate tax and generation-skipping transfer tax from $5,000,000 to $10,000,000 for decedent’s dying and generation-skipping transfers made after December 31, 2017 (adjusted for inflation after 2010).

Repeals the estate tax and generation-skipping transfer tax for decedent’s dying and generation-skipping transfers made after December 31, 2023.

Increases the basic exclusion amount for gift tax from $5,000,000 to $10,000,000 for gifts made after December 31, 2017 (adjusted for inflation after 2010).

Does not repeal the gift tax, but reduces the top rate for the gift tax to 35 percent from 40 percent for gifts made after December 31, 2023.

No change to the step-up in basis of an asset at death.

No change to treatment of retirement accounts.

Repeals the Alternative Minimum Tax.

Pass-through businesses pay a 25% tax rate, excluding some professional service partnerships such as lawyers and accountants.